As goes Illinois, so goes New York?

by E.J. McMahon |  | NY Torch

The expected state court battle over newly enacted public pension changes in Illinois will bear close watching throughout the country–especially in New York. That’s because, when it comes to protecting pension benefits, the 1970 Illinois State Constitution closely follows the wording of New York’s 1938 State Constitution.

Article V, Section 7 of the New York State Constitution reads as follows:

After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.

The Illinois constitutional language is very similar:

“Membership in any pension retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall be neither diminished nor impaired.”

Although courts in the Empire State have never ruled on this specific point, New York officials (and, naturally, public employee unions) have long assumed that their state Constitution prohibits any change to pension benefits for current retirees or active workers, regardless of whether vested employees have worked long enough to earn or “accrue” the maximum benefit. Changes to pension benefits are applied only to workers hired after the enactment of a pension reform law, as in the case in Gov. David Paterson’s Tier 5 plan and the Tier 6 changes pushed through last year by Gov. Andrew Cuomo. This significantly reduces the savings that can be realized from such reforms.

In Illinois, however, a Democratic governor and Democrat-dominated Legislature have just agreed—under increasing financial duress—to raise the minimum retirement age for current workers and to limit future cost-of-living increases even for current retirees. The defense of this action on constitutional grounds is summarized in a 2010 opinion solicited by the Chicago Civic Committee.  That opinion, in turn, rested heavily on a mid-1970s Illinois Supreme Court decision implying that the only pension benefits protected by the Constitution were those “which had been earned.”

Public employee unions in Illinois are promising to go to court to challenge the pension “reform” as a violation of that state’s Constitution.  Depending on the outcome, this might have an eventual bearing on future pension reform efforts in New York. Precedents in one state aren’t binding in another, of course, but state judges have been known to cite rulings by their counterparts in other states when they are dealing with almost identically worded statutes, particularly when the underlying issues are similar.

Illinois has the single most-underfunded pension system in the country–even by lenient government accounting standards—while the New York state funds can claim to be in better shape (both by government standards and using a more appropriate discount rate). The reason for that difference also can be traced to the judicial system, because the New York State Court of Appeals–in contrast to its Illinois counterpart—has had the opportunity to draw a clear line on the issue of pension funding “impairment.” In the early 1990s case of McDermott v. Regan, the Court struck down an attempt by Gov. Mario Cuomo and the Legislature to shift to a lower-cost pension funding method that arguably would have weakened the system’s funded status.  This reinforced the notion that government employers in  New York must make their annual required contribution–although recent state law has given them a troubling amount of wiggle room in this area.

In Illinois, by contrast, state officials have, for years, been grossly under-funding their pension plans via a series of gimmicks, without union protest or judicial interference.

Meanwhile, even as the Illinois pension reform deal was being finalized in Springfield, a bankruptcy court judge was clearing the way for a possible reduction in benefits for Detroit city employees.  As it happens, Michigan’s constitutional provision is similar to New York’s and Illinois, with one crucial difference.  Article IX, Section 24 of the Michigan constitution refers specifically to “accrued financial benefits,” which implies that the city of Detroit could, quite apart from bankruptcy, seek to restructure benefits not yet fully earned by current employees.  Since the federal bankruptcy judge could abrogate contractual commitments, the distinction may not be moot in any case.

- E.J. McMahon is the President at the Empire Center for Public Policy.